11: Money and Banking
- Page ID
- 158651
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 11.1: Introduction to Money and Banking
- This page examines the concept of money, detailing its historical forms, particularly cowrie shells, and their effectiveness due to durability and counterfeiting challenges. It ties the role of money to macroeconomic goals like growth and inflation control, underscoring the significance of monetary policy and banking. The discussion also highlights the progression of money into modern innovations, including cryptocurrencies.
- 11.2: Defining Money by Its Functions
- This page examines the functions of money, comparing commodity money and fiat money. Money acts as a medium of exchange, store of value, unit of account, and standard of deferred payment, resolving barter inefficiencies. Historically, items like gold and shells served as commodity money, valued for their worth. In contrast, modern economies predominantly use fiat money, which lacks intrinsic value but is accepted as legal tender through government decree, depending on public trust for its value.
- 11.3: Measuring Money- Currency, M1, and M2
- This page outlines the definitions and classifications of the U.S. money supply, focusing on M1 and M2. M1 includes highly liquid assets like cash and checkable deposits, while M2 adds less liquid assets such as time deposits and money market funds. The Federal Reserve monitors these categories to highlight asset liquidity. It also explains that debit and credit cards facilitate transactions but do not affect the overall money supply in the economy.
- 11.4: The Role of Banks
- This page explains the role of banks as intermediaries, detailing their functions in facilitating transactions, managing assets and liabilities, and lowering transaction costs. It illustrates bank structures, including loans, bonds, and reserves, emphasizing the effects of interest rates on net worth and the risks of bankruptcy during economic downturns.
- 11.5: How Banks Create Money
- This page explores banking's role in money creation through lending, detailing how deposits are converted into loans and the money multiplier effect. It highlights the importance of T-account balance sheets, banking risks, and the necessity of trust in the economy. Additionally, it reviews the evolution of cryptocurrencies since 2009, emphasizing their value driven by market forces and their criteria as money.
- 11.6: Key Terms
- This page covers essential financial concepts, including assets, liabilities, and different types of money such as fiat and commodity-based. It discusses financial institutions, payment methods (credit/debit cards), and balance sheet structure. Key money supply measures, M1 and M2, are explained, along with the functions of money. Additionally, it highlights bank capital, diversification, and transaction costs, providing a comprehensive overview of fundamental financial principles.
- 11.7: Key Concepts and Summary
- This page sums up money by its key functions: medium of exchange, unit of account, store of value, and standard of deferred payment, distinguishing commodity and fiat money. It explains money measurement via M1 and M2, outlines banks' roles as financial intermediaries, discusses the risks of negative net worth, and describes how banks create money through lending. Additionally, it introduces the money multiplier, illustrating the relationships between banks, deposits, and loans.